Transmission's biggest cheerleaders met last month in San Diego to talk about a subject near and dear to their wallets. During his presentation to his fellow speculators, Ray Wood, head of U.S. power and renewables at Bank of America Merrill Lynch said:

Wood wasn't just bragging, however, but trying to convince everyone that transmission needs big, double-digit rates of return in order to attract capital.

According to Wood, funds for transmission are readily available, however transmission is so risky that no one wants to invest in it until a project has been awarded a "notice to proceed."

This is a lie. There is no risk involved in building transmission. Transmission incentives awarded by FERC routinely place all risk on consumers. One incentive awarded by FERC to all who ask is guaranteed recovery of 100% of prudently-incurred project cost. Another is the ability to collect a return on investment during the construction period (CWIP in rate base). The investor cannot lose if he is guaranteed to receive his entire investment back, plus a generous return, even before the project is constructed.

What Wood is whining about is that brief period of time between the day some transmission owner rolls out of bed with the idea to build a transmission goldmine, and the day incentives and a formula rate are approved by FERC. This is the only time when investment isn't earning a great big return. After that, it's all $$$$$!

Wood pretends that there's some further risk during other necessary approvals, such as a state CPCN or an environmental review. The investor is still earning during this time -- where's the risk? The only "risk" is that a project may be abandoned if it cannot buy necessary approvals, therefore the "sky's the limit" amount of investment that it was possible to make actually constructing the project is curtailed, and the investor is left with a smaller investment that is still earning around 12%. Oh, boo hoo.

And what about projects sponsored by transco spinoffs of gigantic investor owned utilities? These companies often self-finance the early cost of a project by borrowing at the parent company level at extremely low rates, and then earning a 14.3% return on that investment. In the case of the PATH project, the company never borrowed any money, however they still collected a 14.3 or 12.4 percent return on money they probably borrowed at 3 or 4%.

So, how do we fix this to make both Wood and electric consumers happy? How about setting limits on incentive rate of return periods to coincide with the "risky" periods of a transmission project? Transmission is only competing with other investments at the beginning. Once the investment is made and the project constructed, all risk disappears. So, what if incentive ROEs were gradually lowered over the life of the asset? As well, incentive ROEs should not kick in until an actual investment in the project has been made by an entity other than the company or its parent. Transmission owners are scamming us big time!

The media's favorite, new energy story centers on how traditional utilities are panicking over the ever-shrinking pool of customers created by on-site renewable generation and energy efficiency. Now the New York Times has also jumped on the bandwagon. This is it utility friends, change or die!

The smart companies are finding new niche markets that will secure their longevity. The stupid companies are wasting a whole bunch of money trying to lobby solar out of existence. Do I have to start handing out my own series of Utility Darwin Awards?

"Because transmission is such a long-term asset, we must be extremely mindful of how new projects relate to each other to achieve comprehensive energy policy goals. If we continue to approach transmission as a hodgepodge, knee-jerk reaction to serve short-term goals and provide sustainable revenue streams to investor-owned utilities, we risk setting ourselves up for a possible future where a huge investment in transmission becomes the financial responsibility of a shrinking pool of ratepayers. Technological advances and affordability are making it possible for an increasing number of consumers to produce their own power and feed it into the local distribution grid by making their own smart, fuel-free, power producing investments. Energy efficiency and demand management gains continue to shatter future demand projections, further decreasing the need for billions of dollars of investment in new transmission infrastructure."It only took just over a year to get this observation mainstreamed into the pages of the New York Times. Perhaps NYT isn't getting timely information while worshipping at the alter of for-profit utilities?

Yesterday, FERC issued a Policy Statement intended to further refine their policy for awarding financial incentives to transmission projects. The Policy Statement was the Commission's response to the extensive, 42-page, 74-question Notice of Inquiry it issued in May of 2011.

The financial feeding frenzy has been scaled back for now and transmission owners have had their bag limits on consumer wallets reduced.

"In particular, the Commission: reframes its nexus test to focus more directly on the requirements of Order No. 679; expects applicants to take all reasonable steps tomitigate the risks of a project, including requesting those incentives designed to reduce the risk of a project, before seeking an incentive return on equity (ROE) based on a project’s risks and challenges; provides general guidance that may inform applications for an incentive ROE based on a project’s risks and challenges; and promotes additional transparency with respect to the impacts of the Commission’s incentives policies."

1. "The Commission will no longer rely on the routine/non-routine analysis adopted in BG&E asa proxy for the nexus test."

What this means: The nexus test requires an applicant for incentives to demonstrate a connection between the incentive(s) requested and the risks and challenges that a project faces. Previously, once an applicant demonstrated that a project was not routine, the nexus test was satisfied and the project was deemed to face risks and challenges that merit incentives. In the refined policy, FERC tosses out the routine/non-routine analysis and will require project applicants seeking incentives to demonstrate how the total package of incentives requested is tailored to address demonstrable risks and challenges and must provide sufficient explanation and support to allow the Commission to evaluate each element of the package and the interrelationship of all elements of the package. If some of the incentives would reduce the risks of the project, that fact will be taken into account in anyrequest for an enhanced ROE. In short, applicants will have to do more to demonstrate risks and challenges that merit incentives.

2. "The Commission expects incentives applicants to seek to reduce the risk of transmission investment not otherwise accounted for in its base ROE by using risk-reducing incentives before seeking an incentive ROE based on a project’s risks and challenges."

What this means: A transmission's base ROE (the interest a project earns on its investment) is already set to account for the riskiness of transmission investment. However, when a transmission project is riskier than a "normal" transmission project, it can be granted additional incentives to compensate for additional risk. However, a project must request and utilize risk-reducing incentives before requesting an incentive ROE (extra interest) on a particular project. A project owner must show how their project is riskier than "normal" and then how certain risk-reducing incentives will compensate for or reduce risk. If the project is still so risky that risk has not adequately been reduced through the base ROE and risk reducing incentives, it may also request further risk compensation in the form of an enhanced ROE (extra interest). The Commission is getting tougher judging risk and the need for a full spectrum of every available incentive. No more using the same risk as the basis for every incentive. Each incentive granted will reduce risk and a company would have to prove further risk that has not already been compensated for with other incentives in order to be awarded an incentive ROE.

3. "Investments in the following types of transmission projects may face the types of risks and challenges that may warrant an incentive ROE based on the project’s risks and challenges that are not either already accounted for in the applicant’s base ROE or could be addressed through risk-reducing incentives:

1. projects to relieve chronic or severe grid congestion that has had demonstrated cost impacts to consumers;2. projects that unlock location constrained generation resources that previously had limited or no access to the wholesale electricity markets;3. projects that apply new technologies to facilitate more efficient and reliable usage and operation of existing or new facilities."

What this means: I think it's pretty self-explanatory.

4. "The Commission will no longer consider requests under Order No. 679 for a stand-alone incentive ROE based on an applicant’s utilization of an advanced technology."

What this means: No more incentive ROEs based solely on advanced technology, this will be considered as part of a project's risks and challenges (see 3 above).

5. "Risks may be reduced through the risk-reducing incentives described in section II.B, or through mitigating costs by implementing best practices in their project management and procurement procedures. Applicants should consider taking measures tailored to mitigate the various risks associated with their transmission projects and to identify such measuresin their applications."

What this means: Transmission Owners need to stop creating risks through poor management or bad choices and then asking to be compensated for it.

6. "The Commission expects applicants for an incentive ROE based on a project’s risks and challenges to demonstrate that alternatives to the project have been, or will be, considered in either a relevant transmission planning process or another appropriateforum. Such a showing should help identify the demonstrable consumer benefits of the proposed project and its role in promoting a more efficient, reliable and cost-effective transmission system."

What this means: No more PATHetic projects! An applicant must demonstrate to the Commission how its project was compared to alternatives and found to be the most cost-effective solution. Of course, a showing could be that an RTO/ISO has made this determination. And since RTO/ISOs are nothing but industry cartels that will choose the projects of their favored incumbents and then make up a justification to support their choice afterward, this really doesn't solve the problem. However, the transmission owner now has to convince the Commission that it was done properly.

7. "The Commission expects applicants for an incentive ROE based on a project’s risks and challenges to commit to limiting the application of the incentive ROE based on a project’s risks and challenges to a cost estimate."

What this means: Any incentive ROE will only be applied to a project cost amount that was used to determine the project's cost effectiveness as evaluated by an RTO/ISO. So, say a project is found to be superior to other alternatives at a certain price when evaluated by an RTO/ISO, and then is awarded an incentive ROE by FERC. The project can no longer apply the incentive to amounts that go over budget. Historically, projects have floated bogus cost estimates at RTOs in order to get projects approved, and then spent a lot more actually building the project, and collected extra interest on the overspend. This situation perpetuated the "the more you spend, the more you make" scenario that has plagued transmission projects and is breaking consumers while unjustly enriching transmission owners and contractors. The Commission also gives a nod to SPP's cost containment proposal submitted in comments as a reasonable example.

While these are generally positive changes, they don't go nearly far enough and completely fail to tackle the underlying problems with FERC's transmission incentives policy. FERC has merely set the stage for another long, slow decline toward lazy rubber stamp approval of ridiculous incentive packages that cause consumer concern. The PATH project was the impetus for the NOI and the refinement handed down yesterday. How long before another PATH happens?

I'm not sure what happened between FERC's rather auspicious and ambitious beginning in issuing such a great NOI, and this Policy Statement that feels like a punt. It could be that there was too much controversy among the Commissioners. It could be that there was too much political pushback from a greedy industry. And don't forget those personal visits to the Commissioners from transmission owning CEOs. Whatever happened, it looks like the Commission lost their nerve and took what they feel is the easy way out.

See statements of Commissioners Norris and LaFleur here. It's interesting that they didn't publish a statement from Commissioner Moeller, since he had plenty to say yesterday. Maybe he's part of the problem. Wellinghoff didn't have much to say about it, and Clark was not participating.

It seems like the Commission was afraid if they came down too hard on transmission incentives that they would stifle investment. However, they have quite effectively managed to do just that with their Policy Statement. Which transmission owner do you think is going to be brave enough to step into the void and be the first to apply for incentives under the refinement (which was effective yesterday, btw)? Not a one of them. They're all going to hang back and wait for someone else to poke the first stick into the lion's cage so they can begin the process of finding ways to work around well-intended changes in order to continue to unjustly enrich themselves building unnecessary transmission.

I guess if Congress really wants transmission incentive policy reform, they're going to have to do it themselves through amendments to the Energy Policy Act. I can only wish them luck.

It's been so long you've probably forgotten all about FERC's Notice of Inquiry on Promoting Transmission Investment Through Pricing Reform. Thankfully FERC hasn't.

The NOI, issued in May 2011, solicited public comment on FERC's policies for awarding financial incentives to transmission projects.And the public responded. FERC was deluged with hundreds of comments from elected officials, corporate beneficiaries of the incentives, trade groups, and most importantly an avalanche of comments from the most significant "stakeholders" of all -- you, the consumer who pays for the incentives.

Those of you who filed comments on FERC's Transmission Incentives NOI probably got this from FERC yesterday. So, what does it mean? Nothing, really. It's FERC's way of nicely saying that they haven't forgotten about the NOI and to go away until they want to rattle your cage.

Nudge, nudge, FERC. Some people are getting impatient that you seem to have clammed up about transmission incentives after being deluged with comments from states, environmental and consumer groups, and angry citizens.

It makes perfect sense. But it doesn't make a bunch of unearned profit for transmission owners. Cue the whining... the IOUs should be responding in... 3, 2, 1...

It could have been better if they hadn't started out spelling two out of four Commissioners' names wrong. And, that word "incentive" is such a toughie! It isn't a verb. Even grammar experts can't agree on how to turn it into an action word. However, once you've picked one of the bastardized verb versions, please stick with it throughout the document. I'm glad this isn't an English 101 test.

But, hey, something amazing happened with this letter... WV's Consumer Advocate finally weighed in on the matter of FERC's transmission incentives! If he'd gotten involved sooner maybe they would have found out that there's already plenty of transparency between costs and reward in a formula rate. It's that line item called "Return." It's not that hard, Byron.

When FERC codified the EPAct language, they made a minor wording change that makes a huge difference, costs consumers billions, and perverts the original intent of the Act. The EPAct language states "...the Commission shall establish, by rule, incentive-based (including performance-based) rate treatments for the transmission of electric energy in interstate commerce by public utilities for the purpose of benefitting consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion." FERC's Order No. 679 changed this language to read, "... either ensure reliability or reduce the cost...". Right away, consumer rates take a jump because reliability projects that only increase costs are allowed under Order No. 679.

The history of the EPAct supposedly trickled down from this 2003 blackout task force report recommendation:

Clarify that prudent expenditures and investments for bulk system reliability (including investments in new technologies) will be recoverable through transmission rates.

Do you see anything in there that recommends incentives for the construction of a whole bunch of new transmission lines running parallel to existing, outdated, inefficient transmission lines? Me neither. It recommends that we improve transmission without specifying how.

But, Congress specified exactly how this would be accomplished in the EPAct, Sec. 219 (b) (1) & (3):

(b) CONTENTS.—The rule shall--(1) promote reliable and economically efficient transmission and generation of electricity by promoting capital investment in the enlargement, improvement, maintenance, and operation of all facilities for the transmission of electric energy in interstate commerce, regardless of the ownership of the facilities;(3) encourage deployment of transmission technologies and other measures to increase the capacity and efficiency of existing transmission facilities and improve the operation of the facilities; and

This is a point that StopPATH made in their NOI comments last year. FERC has interpreted and codified Sec. 219(b) as (1) applying to new facilities only; and (3) applying to existing facilities. This is also a perversion of interpretation on FERC's part. In the NOI, FERC expressed their puzzlement that no one had applied for incentives on existing facilities. Really? It's quite simple, Sherlock, improving existing facilities doesn't require as large a capital investment on the part of the transmission owner as building new facilities does. That capital investment is what earns outrageous ROE rates as high as 14.3%. The more they invest, the more equity profit they make. As well, FERC policy says that "routine" project and upgrades are not eligible for incentives. That wasn't the intent of Congress in the EPAct. In addition, FERC uses the price tag of a project as one of the factors in the nexus test. FERC's policy is geared toward enriching transmission owners to the detriment of consumers.

Building new transmission while allowing interconnected, existing infrastructure to continue to deteriorate, fail and cause blackouts is not what Congress had in mind. FERC's approach is like putting a piece of cardboard over a broken window and then cutting a hole and installing a new window right next to the broken one.

The CRS report opines that transmission investment over the next 20 years will be in the neighborhood of $298B. It also states that FERC may opt to do nothing about its incentives policy. Perhaps it's time for Congress to step back in and assert its authority to ensure its orders are being properly carried out before electricity costs completely bankrupt struggling consumers.

Although they've had four months to get it accomplished, the vast majority of the regulatory bodies, special interest groups and corporate interests waited until the last moment to submit comments on FERC's NOI Promoting Transmission Investment Through Pricing Reform. As I'm sure many of you who submitted individual comments and were added to the service list noticed, FERC was flooded with at least 50 sets (or more?) of comments yesterday. I haven't even had time to count them all, and another one just appeared from Morgan Stanley a few minutes ago. Really? A day late and a dollar short, fellas!

Due to a bunch of other issues going on, I haven't even had time to read the vast majority of them. (I'm still hoping my Acme cloning machine will arrive in the mail any day now...) If you're not on the service list and want to do some great reading (not all of them are technical, confusing minefields) here's how to find them. Go here and change the date range to "previous 1 year" and then type "RM11-26" into the Docket Number field and click "submit." That should bring up a long list of comments filed specified by author.

Some of the ones I have read that I recommend are the comments of the Virginia State Corporation Commission -- short, sweet and very much to the point.

Also recommended are comments of Transmission Access Policy Study Group. Although I disagree with their love of all things transco and their love of transmission projects in general, the law firm that wrote their comments managed to point out everything wrong with FERC's incentives policies and defended the consumers who end up paying for them. I noticed that Spiegel McDiarmid also authored some comments from other groups, but I haven't had time to read them yet to see if the theme continues.

Just about any set of comments from a state public service commission is guaranteed to be a good read, although I have only sampled a few.

On a humorous note... the comments of FirstEnergy gave me a giggle. Check out the signature block at the end. What's missing? The PATH companies! FE is backing away from their poster child that represents all that's wrong with transmission incentives. Too funny!!!

I heard that AEP made mention of PATH in a "hands off" kind of way as well. I guess the PATH parents are too proud to claim the juvenile delinquent they gave birth to.

Overall, from what little I've read, it looks like FERC is getting an earful. The comments against seem to be greater in number, but the comments from the industry are whining much louder. So, let's take a look at who's on what side of the fence:

Against Incentives - States, an couple of mystery financial analysts, some industry groups, and tons and tons of citizens who act as the Transmission Line Savings & Loan.

For Incentives - Energy and transmission corporations, some investment companies. You know, the ones who are robbing the citizen-funded Transmission Line Savings & Loan.

Could it be any more obvious? And if you think FERC still needs to have it explained to them in perfect detail, read the comments of Steven, Shirley and Samuel Smith of Charles Town. The only thing left undone was drawing them a picture.

Citizens Against Kemptown Electric Substation (CAKES) filed their comments on FERC's NOI Promoting Transmission Investment Through Pricing Reform this morning. They did a fantastic job of making insightful suggestions for reform. I think my favorite, in light of recent events, is:

"9. FERC’s Conflict of InterestIt is not possible to serve public ratepayers’ interests when FERC is both promoter and regulator of the utility industry. It has been shown by several Federal agencies that being responsible for both promotion and regulation of an industry leads to ineffective performance of both responsibilities and is a violation of public trust. One historical example for resolving this problem in 1974 was the splitting of the U.S. Atomic Energy Commission (promoter and regulator) into the Nuclear Regulatory Commission (regulator) and the Energy Research and Development Agency (now Dept. of Energy) (promoter). It is time for the U.S. Congress to split FERC into two separate agencies in order that the two responsibilities can be carried out effectively.One particular example of this FERC conflict of interest is FERC’s gathering of coalbased utilities, PJM, and FERC officials in Charleston West Virginia on 13 May 2005 atthe FERC-sponsored conference "Promoting Regional Transmission Planning and Expansion to Facilitate Fuel Diversity Including Expanded Uses of Coal-fired Resources". The conference record shows a blatant bias toward promoting both generation and transmission by coal-based utilities, which FERC also is supposed to beregulating. This bias has been perpetuated by FERC since 2005 while loading up coalbased utilities with multiple layers of incentives for building long-distance coal-based energy transmission lines (e.g. PATH Project) cross-country to the East Coast instead of supporting the construction of local renewable wind-based energy generation and distribution lines locally on the East Coast near the load centers. In the interest of credibly serving U.S. Administration energy policy regarding incentives and alternatives, FERC should take the initiative to assess its own dual responsibilities and request the U.S. Congress to split FERC into two independent agencies.Regulatory reform is needed for FERC. The U.S. Courts already have indicated this need by their recent decisions. The U.S. 9th Circuit Court of Appeals in 2011 curtailed FERC’s free-wheeling promotion of National Interest Electric Transmission Corridors and coal; and the U.S. 4th Circuit Court of Appeals curtailed FERC’s “backstop” siting authority over state public service commissions. Unlike other regulatory agencies, forexample the NRC, FERC has not maintained its independence and does not keep utilities and RTO’s at arm length distance in FERC decision making. This is aworthwhile topic for further investigation by the General Accounting Office (GAO). Moreover, RTO’s like PJM are not agents of the U.S. Government and, therefore, arenot bound by the ethics laws for protecting the interests of the public and public trust that U.S. Government agencies, such as FERC, are bound to, in particular with regard to agency actions and public perceptions concerning waste, fraud, and abuse. PJM is,in effect, a trade association of selected share-holder owned electric companies and has a built-in bias toward representing influential electric company members of PJM."

About the Author

Keryn Newman blogs here at StopPATH WV about energy issues, transmission policy, misguided regulation, our greedy energy companies and their corporate spin.In 2008, AEP & Allegheny Energy's PATH joint venture used their transmission line routing etch-a-sketch to draw a 765kV line across the street from her house. Oooops! And the rest is history.

AboutStopPATH Blog

StopPATH Blog began as a forum for information and opinion about the PATH transmission project. The PATH project was abandoned in 2012, however, this blog was not.

StopPATH Blog continues to bring you energy policy news and opinion from a consumer's point of view. If it's sometimes snarky and oftentimes irreverent, just remember that the truth isn't pretty. People come here because they want the truth, instead of the usual dreadful lies this industry continues to tell itself. If you keep reading, I'll keep writing.